How to Know if You’re Ready to Buy a Home

The four questions every potential homebuyer should ask before investing in residential real estate

Buying a house is no small feat: but for those ready to put down roots and make an investment in their future, it can be worth it. If you’re sick of renting and want a home of your own, it’s time to take a look at your financial situation and determine if you’re ready to take the next step. Your decision-making process will differ slightly if you’re considering a condo, a new home or a fixer-upper, but no matter what type of property you’re buying, there are some universal factors to consider before making the leap from rental to ownership. Potential homebuyers should ask themselves these four questions to determine if the timing is right to invest in a residential property.

1. How Is Your Overall Financial Health?

Buying a home is the biggest investment many people will make, so take an honest look at your financial situation to determine if you’re ready. First, think about the down payment, which is usually between 10-20% of the total home cost. If you don’t have at least 10% on hand for the down payment, take a step back and focus on increasing your savings. Ideally, you’ll have closer to 20% for a down payment saved.

Now consider all your debt, including credit card debt, auto loans, student loans, and any other personal debt. Some debt, like student loan debt, is acceptable when applying for a home loan, while other types of debt, namely credit card debt, will work against you. If you have a significant amount of debt, it’s probably because you don’t have enough money to pay it off. This is a red flag that you’re not ready to buy a house. When you’ve paid off all debt outside of loans for large purchases or investments (like student loans or an auto loan), you’ll be in a better position to apply for a home loan and make mortgage payments.

Finally, check your credit score. Get your score to 680 or higher before thinking about applying for a home loan. This might take some time; you may have to reallocate some of your down payment savings toward debt repayment. But these are necessary first steps. If your credit score is less than spectacular due of fraud, dispute the charges, and make sure everything is in order before applying for a loan.

2. How Long Do You Plan to Stay In One Location?

Buying a home is an expensive and time-consuming process, so most people want to make sure they’re going to stay in the home for a while once they move in. If you change locations often for work, renting might be an easier and cheaper option. If you know you’ll stay in one place for years, but you expect your family might grow soon (and potentially outgrow your current home), wait to buy until you know how much space you’ll need. Consider this calculation: Ann Reilley Gugle, a planner in Charlotte, N.C., says it takes at least five years to break even on a home. The upfront costs of buying a property may only level out if you plan to stay for the better part of a decade, or longer.

3. What Are the Patterns or Trends In Your Current Real Estate Market?

Look closely at long and short-term national trends, because recessions or economic growth can dramatically affect the cost-effectiveness of buying real estate. Even more important than national statistics are local trends: the real estate market can change dramatically from city to city and even neighborhood to neighborhood. Real estate value in cities like San Francisco and Seattle has been rapidly climbing in recent years, while home prices in cities in the Midwest have fallen or stayed the same. The rental market in your chosen city may also factor into your decision. In some cities, the rental market can be very expensive, making home ownership more affordable if you have sufficient savings. Combine national trends with trends in your chosen community to get a sense of how the market will determine your home price and value.

4. Do You Fully Understand the Cost of Home Ownership?

The cost of buying a home includes more than the down payment and mortgage. Add to that expenses like property taxes, insurance, HOA dues, repairs, utilities and more. Most online mortgage calculators take homeowners insurance and property taxes into account. Make sure you enter numbers specific to your market, since taxes and insurance rates can vary widely by city. Homeowner association fees cover things like amenities, and can come in handy if something goes wrong in your home. However, they can add up to hundreds of dollars per month, and for some families that might not be worth the cost. Take HOA fees, projected repair fees and regular maintenance costs into account when calculating how much a new home will cost per month. Brandon Turner of Money Under 30 warns against taking on a monthly payment that is more than 25% of your take-home pay. He says that often lenders will tempt buyers to stretch themselves thin, but in the long run it’s not a good idea.

If you’ve asked yourself these four questions and think you’re financially ready to invest in a home, check out our homeowner’s guide and other resources on this topic. Then, contact Anselmo Lindberg and Associates to speak with our experienced real estate attorneys and take the first steps on your way to home ownership.

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